Fund Commentary

Equity markets rebounded significantly in Q1 after a tumultuous end to 2018. The MSCI ACWI Index returned 12.4% in local currency terms, the biggest quarterly gain since the rebound from the financial crisis in 2009.

‘The U.S. vs. the World’ was one of the key themes that emerged in Q3. Equities continued to outperform bonds over the quarter, with the MSCI ACWI returning 4.7% in local currencies and 2.5% in CAD terms. This compares favorably to -0.2% on the Bloomberg Barclays Global Aggregate Bond Index hedged to CAD and -1.1% on the equivalent Canadian bond index.

The theme of higher volatility, which began in the first quarter, continued through the second. Equities outperformed bonds over the quarter, but it was not smooth sailing as markets reacted, sometimes forcefully, to signs of a slowdown in global growth or to political events.

Q1 2019 Commentary

Mackenzie Multi-Asset Strategies Team

Market Review

Equity markets rebounded significantly in Q1 after a tumultuous end to 2018. The MSCI ACWI Index returned 12.4% in local currency terms, the biggest quarterly gain since the rebound from the financial crisis in 2009. A more dovish sounding Fed and indications of progress in the China-U.S. trade talks helped propel markets. Similarly, bond markets also experienced one of the strongest quarters in years with the Bloomberg Barclays Global Aggregate Bond Index Hedged to CAD returning 2.8%. A global slowdown in growth alongside more dovish central banks resulted in lower yields and higher bond prices.

Outlook & Strategy

Swimming in Cross-CurrentsA Bad Quarter for Growth, but a Good Quarter for Asset Prices

What a difference a quarter makes. 2018 was, by and large, a good year for the economy, at least in the U.S., but a bad one for assets. From fixed income to equities and commodities, there were few places to hide in 2018. Q1 2019, by contrast, saw strong performance for most assets – and especially for those which were hurt the most last year (e.g. Chinese equities or crude oil).

However, this positive first quarter occurred amid a notable slowdown in the real economy. The most obvious place where this is happening is the United States, which in 2018 was a bastion of strength in a decelerating world. Several U.S. economic indicators – notably manufacturing activity, housing and retail sales – have begun to point to a slower pace of expansion. Some indicators are now flirting dangerously with outright contraction.

The rest of the world, which led the U.S. on the way down in 2018, has not been spared this latest economic deceleration. Europe, a perennial pain point for the global economy, remains weak and is currently exhibiting recessionary conditions. Eurozone policy makers last year pointed to ‘temporary factors’ when attempting to explain the slowdown, but it now appears that something deeper has been going on in the single currency area. Germany’s flash manufacturing PMI for March, at 44.7, is indicative of a relatively severe contraction in the country’s export-oriented manufacturing sector.

So, we are faced with a dichotomy where assets have rallied in Q1, but where the economy has been weakening. What should we make of this?

Some Positive Changes from last Quarter…

The first element to note is that this coming economic weakness was partly priced in by markets. Asset prices tend to anticipate changes in economic conditions about six to nine months ahead of time. Therefore, what matters isn’t so much what happens in the economy as what markets think will happen. So far, the growth figures do not appear to have been much worse than what was already discounted by markets given the poor equity market performance in Q4 of 2018.

For our part, the Multi-Asset Strategies Team moved to a tactical underweight position in equities in October of last year, as our analysis flagged growing risks of disappointments on the economy and on earnings. We have since moved back to neutral following the corrections, as we thought market prices to be more in line with a reduced pace of economic expansion.

An important positive factor has been the Fed’s sudden shift to a more dovish stance. Fed Chair Jerome Powell’s first year on the job was a little bit rocky, as he experienced a few communications mishaps. In October, he said that rates were “a long way from neutral”. This spooked markets, implying that many more rate hikes were in the pipeline. Then, on December 19, he said that the Fed had its balance sheet runoff “on automatic pilot”. This was horrifying for markets, suggesting that the Fed would not even consider adjusting its policy in response to weakness in the data! Following these communication problems, an important adjustment came on January 4, when Chair Powell walked back those comments, saying the Fed would be “patient”. This sounds like a minor adjustment, but from our perspective, it was Powell’s body language which emphasized the importance of his change of mind: he read his more accommodative comments from a piece of paper pulled out of his suit jacket. We interpreted this as an attempt to avoid yet another communications mistake by carefully reading prepared remarks instead of improvising. In our view, this meant – and still means – that rates probably won’t rise above the neutral level in this cycle. Current market pricing is now consistent with Fed rate cuts later this year. This responsiveness by the Fed increases the odds of a soft landing in the U.S. economy, as opposed to a full-blown recession caused by too much tightening.

Finally, hints from the White House on the trade front seem to indicate that some progress has been made in the negotiations with China. Meanwhile, in China, we have also begun to note a push toward selective, targeted stimulus measures. The Chinese policy leadership is forced to grapple with a deterioration in the external environment and a slowdown in its main export destinations (North America and Europe). This is pushing policymakers to apply some domestic stimulus, bolstering Chinese markets.

… but Don’t Get Ahead of Yourselves

Despite these positives, it isn’t time to become euphoric just yet. First, it is worth taking stock of valuations. We analyze several valuation metrics across many markets, so no single indicator can summarize the entire evolution of valuations across equities. However, for illustration purposes and for simplicity, it is helpful to consider a simple forward price-to-earnings ratio on the S&P 500. After a tax cut-induced ‘sugar rush’, the S&P 500 was trading at 18x forward earnings at the start of 2018 – a high for the current cycle. It corrected to almost 14x by December 2018. Following the recent rally, we are now back to 16.5x. This is nothing extravagant, but it leaves less room for further improvements in case corporate earnings disappoint.

Another element which we think investors shouldn’t ignore is the direction of the U.S. dollar. Emerging market currencies have shown some resilience in recent months, but the U.S. dollar has remained stubbornly strong against its developed market peers such as the euro and the yen. As an example, many investors would have expected the recent dovish Fed shift to push the euro much higher. It didn’t. This is concerning, because 1) it highlights persistent economic weakness in non-U.S. developed economies such as the Eurozone, and 2) it squeezes companies and sovereigns which borrow in U.S. dollars. We have been underweight the euro against the U.S. dollar since last year for this very reason: we think the Eurozone economy is too weak to withstand any tightening by the European Central Bank. This remains our view. However, if the dollar continues to appreciate, it will represent a financial tightening for economies and markets.

Political risks also remain. There have been some recent indications that we are getting close to a deal between the U.S. and China on trade and sentiment has improved on this front. Any deterioration in tone from the U.S. or Chinese administrations would leave markets vulnerable to a reversal. With the Mueller Report out of the way, attention will now shift gradually to the 2020 U.S. Presidential campaign, which will highlight the deep divisions between the Republican incumbent and his Democratic challengers. Closer to home, the federal election campaign is approaching and the recent turmoil engulfing the Liberal government is likely to make the political news more volatile in the coming months.

Finally, the current soft patch in growth will need to bottom out at some point, or markets will need to revise growth expectations lower. Three scenarios are currently in play: 1) a 2016-like V-shaped rebound in global growth; 2) a ‘soft landing’ and stabilization at a lower level; or 3) slippage into recession. We do not think that the vigor of the 2016 rebound will be repeated, partly because China does not have the ability or willingness to stimulate as aggressively as it did then. Still, we view the country’s current targeted stimulus approach as sufficient to allow the Chinese economy to experience something closer to an ‘L-shaped recovery’, or a stabilization.

The Elephant in the Room: Yield Curve Inversion

Another cause for caution is the current message sent by the U.S. yield curve, more specifically the spread between the 10y U.S. Treasury yield and the rate on the 3m Treasury bill. We just witnessed the first U.S. yield curve inversion since 2007, meaning that the 3m T-bill currently yields more than the 10y Treasury bond. This is typically interpreted as a sign of impending recession.

For this phenomenon to be more meaningful in terms of signalling a recession, the yield curve inversion would need to remain in place for more than just a few days or weeks. For example, if the Fed were to cut interest rates soon, the curve would probably re-steepen in response. This is similar to what happened in 1998, when the 2s10s yield curve spread (10y bond yield minus 2y bond yield) inverted briefly, but re-steepened in response to three Fed cuts. An equity market rally also ensued. However, if the Fed does not cut rates in response to recent economic weakness, the curve is likely to remain inverted, signalling a growing chance of recession.

The Bottom Line

These cross-currents are why, despite the strong performance of equity markets in Q1, the Multi-Asset Strategies Team is not adopting a more aggressive position in our asset allocation and are instead choosing to maintain a neutral position between equities and fixed income. We will be watching macro and market developments closely in the coming months and stand ready to adjust our tactical allocations in response.

Q4 2018 Commentary

Mackenzie Multi-Asset Strategies Team

Market Review

After a long run of calm and generally up-trending equity markets, 2018 proved to be considerably more volatile, with three violent, successive selloffs in February, October, and December. The gradual return of inflation was an important theme throughout the first three quarters of 2018, but disinflationary winds began to blow again in Q4, with a large drop in crude oil prices sending ripples through the currency and bond markets. The MSCI ACWI Index lost 13.2% in local currencies over the quarter, and 7.2% in Canadian dollars. Of note was the underperformance of the U.S. S&P 500, which lost 14.2% over the quarter, reversing a trend of outperformance over the past several years. The Bloomberg Barclays Global Aggregate Bond Index Hedged to CAD gained 1.7% on the quarter, while Canadian bonds performed better (+2.3%).

Outlook & Strategy

As we pointed out in previous quarters, growth is decelerating globally. The U.S. was the last major economy to experience this deceleration in growth, as it appeared first in emerging markets and then in European and Asian developed markets. Until recently, U.S. resilience was underpinning an outperformance of U.S. assets relative to the rest of the world. As the Federal Reserve’s tightening campaign is now more advanced, interest rate-sensitive sectors of the economy have begun to slow down. This is the case, notably, of the housing sector, where activity has decelerated considerably. Indicators of growth in the manufacturing sector are also coming back down to earth, indicating that after a strong 2018, U.S. growth is joining the rest of the world in moderating.

Another break from 2018 trends has been the recent fall in inflation expectations. In fact, most of the reduction in bond yields experienced in the fourth quarter of 2018 was explained by falling inflation expectations. The collapse in crude oil prices (-40% on West Texas Intermediate (WTI) during the quarter), led markets to anticipate a more subdued inflation outlook. Market expectations for further Federal Reserve rate hikes are now much more muted than they were just a few months ago.

Canadian assets have been under pressure, as Canada’s energy woes have been compounded by a lower price for Western Canada Select (WCS) crude. While the decision by the Alberta government to curtail production helped close some of the gap between WTI and WCS, Canada’s energy exposure remains mostly a curse for now, as oil prices fall and Canadian oil continues to trade at a low price compared to global benchmarks. In this difficult environment, the Canadian dollar lost about 7% against the U.S. dollar in Q4, as the market began to doubt the likelihood of further immediate Bank of Canada rate hikes.

Q1 2019 Outlook – Risks Becoming More Apparent

Barring further fiscal stimulus, we expect slower U.S. growth in 2019. It has become apparent that the “sugar rush” experienced by the U.S. economy, following an unusual, late-cycle fiscal stimulus, is disappearing. As mentioned above, interest rate-sensitive sectors of the economy are also slowing. Corporate capital expenditures, an area of strength for the U.S. economy one year ago, are now softening considerably. This suggests that the interest rate normalization process is beginning to be felt in the real economy. We do not view the U.S. economy moving into outright contraction, but we think growth in 2019 will be much slower than the levels registered in 2018.

We also expect Canada to slow down. The Canadian economy has already begun this process. This has been particularly evident in Canadian consumer spending, which has come back down to earth from the elevated levels of growth reached in 2017. This has coincided with a topping out of housing markets in Toronto and Vancouver, suggesting that interest rate hikes by the Bank of Canada have begun to work their way through the system. In our view, this likely will continue into 2019.

China already has slowed down abruptly and is now considering applying stimulus—this will be something to watch in 2019. The Chinese economy responded negatively in 2018 to policy efforts to de-risk and de-leverage the financial system. The government cracked down on the shadow banking system, leading to much slower credit growth. Historically, after sharp economic slowdowns, the Chinese government has tended to stimulate to avoid a hard landing of the economy and maintain job and income growth, two key factors ensuring social stability in China. This would suggest that stimulus is now imminent. The Chinese government has, in fact, cut taxes in recent months, with a view to bolstering consumption. However, the results of this tax cut have so far been muted. Moreover, the efforts to de-leverage and de-risk the financial system are somewhat constraining the government’s ability to stimulate. We will be watching the evolution of this tension in China in early 2019. For now, it does not appear that China is re-accelerating meaningfully.

Europe remains stuck in the slow lane. Market participants had hoped that 2018 could build on a robust 2017 for Europe, with a stronger footing for more sustainable expansion. Once again, markets were disappointed, as European growth underwhelmed. Global trade tensions hurt export-driven European economies such as Germany, while political instability in Italy and the U.K. undermined domestic confidence. Several European equity market indices are now in bear market territory as a result, and forward-looking expectations for the region are much lower than they were at the beginning of last year.

Asset mix: underweight position on equities relative to cash and underweight position in bonds relative to cash.

Foreign exchange: slight overweight in the U.S. dollar relative to the G5 basket of currencies.

In Q1 of 2018, the Multi-Asset Strategies Team went to a neutral position on equities relative to cash. This was a significant change, as we had held a profitable overweight in global equities since Q2 of 2016. In recent outlooks, we wrote of several cross currents playing out in the markets, with positive and negative forces roughly balancing each other out. In early October 2018, the Multi-Asset Strategies Team began to see the balance of risks as having shifted to a slightly more negative side, pointing to the need for a cautious asset mix. This led us to shift to our underweight positions in equities and bonds relative to cash. These investment views are reflected in our Symmetry Portfolios, ETF Portfolios, Multi-Strategy Absolute Return Fund (MSARF) as well as our Private Wealth Pools.

This change has been driven by a few factors. Macroeconomic indicators, while remaining in expansion territory, are now pointing to slower growth ahead. With tighter monetary conditions and fiscal stimulus waning, we expect growth to remain positive, but to be considerably lower than in 2018. In our view, earnings growth will likely be slower in 2019, reducing the support to equity markets coming from macroeconomic factors. On the equity valuation front, the recent fall in share prices has improved the attractiveness of most metrics. However, our assessment of equity valuations remains somewhat expensive. Finally, our modeling of behavioral investor sentiment shows a recent deterioration relative to the last few years. All in all, we believe this warrants an underweight position in equities.

In terms of currencies, we continue to hold an overweight position in the U.S. dollar relative to the broader basket of currencies. Our FX views are out of consensus, as most strategists appear to expect the U.S. dollar to depreciate in 2019. While we recognize that the U.S. dollar valuation versus G10 peers appears to be high relative to historical averages, our macro and sentiment models for the currency are positive. On the flipside, we hold an underweight position in the euro. We continue to believe that the Eurozone will be challenged on the growth front, limiting the European Central Bank’s ability to normalize interest rates. We believe this could disappoint a consensus of strategists which persists in expecting Eurozone interest rate normalization and a rally in the euro.

Q3 2018 Commentary

Mackenzie Multi-Asset Strategies Team

Market Review

‘The U.S. vs. the World’ was one of the key themes that emerged in Q3. Equities continued to outperform bonds over the quarter, with the MSCI ACWI returning 4.7% in local currencies and 2.5% in CAD terms. This compares favorably to -0.2% on the Bloomberg Barclays Global Aggregate Bond Index hedged to CAD and -1.1% on the equivalent Canadian bond index. U.S. equity returns continued to be the primary driver of equity returns, with the S&P 500 returning 7.7% over the quarter. As U.S. growth continues to show resilience, pressures have begun to appear in regions vulnerable to increases in U.S. interest rates and a strengthening U.S. dollar. We continue to view several cross-currents and counterweights across markets heading into Q4.

Outlook & Strategy

At the time of writing this article (October 11, 2018), the S&P 500 has fallen 6.4% (5.5% in Canadian dollar terms) since the beginning of the month with other equity markets following suit. Recent equity volatility appears to stem from the bond market. Real yields have risen sharply while inflation expectations remained flat. This if very significant because it captures two things: 1) the better-than-expected growth of the U.S. economy, and 2) a re-appraisal of prospects for Fed tightening, with more likely to take place. A number of asset prices around the world, including equities, were priced off lower for longer rates. This assumption is now being challenged, which has been a shock for markets. In addition, trade tensions are not helping in terms of market sentiment: markets appear to be spooked by any negative news about the prospects for U.S./China tensions.

However, it is our view that the economy is not rolling over just yet. Some slowdown is likely in 2019 Q1-Q2 from this year’s fiscal stimulus, but things remain robust overall. Recession signs are minimal (if at all present) right now. We have been neutral on equities since March. The recent market turmoil has moved our position to slightly underweight equities and we are keeping a closer eye on how the markets develop. Should markets continue to collapse, we will be adjusting our positions accordingly.

Q3 2018 – Risks Appear Around the World, but the U.S. Economy Remains Resilient

Trade tensions and EM difficulties were present this quarter, but the U.S. economy remained broadly unaffected, as indicators of manufacturing sector activity continued to outperform the rest of the world. The U.S. administration’s imposition of tariffs on certain Chinese products and initial uncertainty over the future of NAFTA raised questions on the immediate outlook for global trade. Yet by and large, U.S. manufacturing activity came out unscathed, accelerating through the quarter. NAFTA uncertainties also dissipated toward the end of the quarter.

Other economies, while continuing to grow, did so at a slower pace. The slowdown that took place in Europe in the first half of this year did not fully stabilize in Q3. Europe also had to grapple with concerns over the Italian budget, which put Italian government bonds under pressure again. Meanwhile, in China, the slide in the value of the renminbi was halted, but economic data continued to point towards a slowdown. This became evident in slower growth in fixed asset investment and industrial output. This took place as global trade concerns continued to weigh on China.

Global equities still managed to gain over the quarter, with U.S. equities continuing to power ahead on strong growth and supportive corporate earnings. Japan also did well, with a gain of about 10% for the Nikkei 225 Index, albeit occurring mostly at the very end of the quarter. Emerging market equities, meanwhile, remained under pressure as trade tensions and the Chinese slowdown weighed on developing economies and currencies. Continued Federal Reserve tightening is proving to be challenging for those emerging market economies with weaker fundamentals and high external financing requirements, as we saw in Turkey over the quarter.

Canadian economic data was mixed in Q3, as job growth continued to moderate relative to last year’s above-trend progression. Wage growth also slowed down from the high levels reached in the first half of the year. However, this is more a reflection of the economy reaching potential, or near-potential, than of a nascent, more meaningful slowdown. Consumer spending remained robust despite the household deleveraging process that has begun, as evidenced by a peak in debt-to-income ratios. In this context, the Bank of Canada continued its gradual interest rate normalization process, hiking rates by 25 basis points in July and signaling more to come in the next several months.

Developments with respect to the nascent trade wars continue to pose risks to global growth and to markets. The U.S.’s recent imposition of 10% tariffs on certain Chinese goods — with the threat to increase tariffs to 25% should no progress occur in trade talks — could hinder the flow of global trade and disturb several supply chains. China’s ongoing economic rebalancing — which includes crackdowns on shadow banking and attempts to reduce leverage — is reducing the pace of growth, posing risks to economies highly exposed to China. Finally, the political calendar remains heavy with the Brazilian Presidential election in October and the U.S. midterm elections in November.

Nevertheless, there are also many positive factors. For example, some bellwether data points offering good cues on the state of global growth began to rebound in recent months. This includes data such as German business confidence and new European passenger car registrations. The resolution of NAFTA uncertainty is also a positive factor for North American growth. This suggests that the lull in growth experienced in the first half may be coming to an end.

U.S. growth is also supportive, despite the Fed’s continued tightening toward the neutral rate. Wage growth is accelerating, supporting consumer spending. Corporate investment is returning, contributing to aggregate demand. Overall, it seems too early to worry about the onset of a meaningful contraction in U.S. growth.

This helps Canada, which remains highly tied to U.S. growth dynamics. This exposure to strong external demand is especially important given Canada’s high levels of household indebtedness, which pose a risk to domestic demand. The dissipation of NAFTA risks will also remove a cloud over the country’s growth picture and enable the Bank of Canada to continue its gradual normalization of monetary policy. Removal of NAFTA uncertainties also will enable Canada to benefit from the full extent of the strength in U.S. demand. Meanwhile, Canada’s housing market seems to be recovering from some of the recent tax measures that were imposed on foreign buyers.

We are underweight bonds relative to cash. This view is generated by our poor assessment of value across the fixed income markets and our macro views, which suggest growing inflationary pressures, a negative factor for bonds. Our models of investor sentiment are also negative for the asset class. The gradual flattening of the yield curve in the U.S. and Canada is decreasing the relative appeal of longer term government bonds versus cash.

Within equities, we view the overall dispersion of opportunities at the regional equity level as remaining low, as we see the relative attractiveness of various equity markets (U.S., Canada, Europe and EM) as being similar. However, we do think that U.K. equities appear cheap relative to other global markets. U.K. dividend yields look particularly high relative to other equity markets — as well as relative to the U.K.’s own bond market. Valuations are low in relative and absolute terms, as Brexit risks are embedded in stock prices. The U.K.’s weak currency is also a boon to the earnings of the multinational corporations included in U.K. indices. We are also overweight Japan, which has seen an improvement in macro conditions. Moreover, our models of investor sentiment point to a positive shift in Japan. The country’s easy monetary policy contrasts with other developed central banks, which are removing accommodation.

Within currencies, we are currently overweight the U.S. dollar relative to the basket of currencies. The strong comparative performance of the U.S. economy relative to Europe and emerging markets suggests to us that a hawkish Fed will continue to provide support to the U.S. dollar. At the other end of the spectrum, we are underweight the euro relative to the basket. We think that several issues will prevent the European Central Bank from normalizing interest rates in the near term. The recent budget issues in Italy underscore economic difficulties in the Eurozone periphery, which continue to weigh on the prospect for monetary policy normalization. Our sentiment readings on the euro are also negative.

Q2 2018 Commentary

Mackenzie Asset Allocation Team

Market Review

The theme of higher volatility, which began in the first quarter, continued through the second. Equities outperformed bonds over the quarter, but it was not smooth sailing as markets reacted, sometimes forcefully, to signs of a slowdown in global growth or to political events. The gradual return of inflation and the resulting central bank exits from ultra-accommodative monetary policies remained a theme that weighed on global bond markets. The MSCI ACWI equity index returned 2.9% in local currencies over the quarter, and about 2.8% in Canadian dollars. The Bloomberg Barclays Global Aggregate Bond Index hedged to CAD returned -0.02%, while Canadian bonds performed slightly better (+0.5%).

Outlook & Strategy

Q2 2018 – Policy Concerns and Signs of a Slowdown in Growth

Following the heightened volatility experienced in Q1, markets had to grapple with slightly weaker growth in Q2, as indicators of manufacturing growth decelerated around the world. In addition to slowing growth, increasing trade tensions began to surface around the world, with reciprocal tariffs being imposed. A heavy political calendar, with elections in several countries, also added to uncertainty.

However, amid this globally-coordinated slowdown, the U.S economy continued to outperform other developed economies. Despite the Fed's continued tightening, the U.S. economy continued to progress at a healthy pace, with solid readings for retail sales and signs of a comeback in corporate capital expenditures. The continued effects of fiscal stimulus, via tax cuts, also supported U.S. growth relative to other countries.

This reinforced the recovery in the value of the U.S. dollar versus most currencies, weighing on emerging markets. While global equity markets managed to gain ground in Q2, this was not the case for emerging market equities. Emerging market governments and companies borrow in dollars and are dependent on dollar liquidity remaining easily accessible and affordable. As such, EM assets, from bonds to equities and currencies, underperformed in Q2 as the U.S. dollar rose.

Canada was no exception to the growth slowdown, as job growth, consumer spending and credit growth all moderated from the strong levels reached in recent years. Despite rising wage growth and inflation, the Bank of Canada refrained from raising interest rates, instead choosing to signal that rate hikes are coming in the next few months. As a result, the Canadian dollar fell against its U.S. counterpart, as interest differentials favored the United States. Meanwhile, the S&P/TSX enjoyed a positive quarter (+6.8%) as energy stocks rallied along with crude oil prices.

Q3 Outlook — Risks Become Increasingly Apparent, but Growth Continues

Several risks have become apparent in the last few months. Political developments in countries as diverse as Italy, Mexico, Brazil, Turkey and the United States have proven to generate ripple effects on global markets. The rising threat of trade wars is becoming more and more real, with the United States imposing tariffs on many of its largest trading partners, including China, the European Union and Canada, all of whom have reciprocated. NAFTA negotiations also continue generating uncertainty for the Canadian economy. The increased tariff threats take place at a time of slowing global growth, compounding the risks to global trade.

Yet several positive factors continue to balance out the aforementioned risks. Chinese policymakers remain proactive in addressing risks and continue to ease monetary policy, with a view to supporting growth, which appears to be stabilizing, following a slowdown that began to develop late last year. As China remains a significant exposure for much of the emerging world, stabilization in Chinese growth in the face of growing trade risks is a support to global growth.

U.S. growth also looks set to continue, despite tighter monetary policy and the risks mentioned above. The Fed is tightening at a measured pace and wage growth continues to recover slowly, supporting consumer spending. The housing sector also remains strong, supporting household balance sheets. Overall, it seems too early to worry about the onset of a meaningful contraction in U.S. growth.

Canadian growth is more mixed. Canada is facing increasing risks related to the housing and credit markets, which have undergone significant slowdowns in growth this year. Given the high levels of household indebtedness, this could hamper growth going forward. Also, our indicators of shorter term growth pressures are picking up. However, the labor market remains solid, with high rates of wage growth recorded and the Bank of Canada, cognizant of the risks, is raising rates at only a slow pace.

We are underweight bonds relative to cash. This view is now shared by 89% of our bond timing models. For example, all our valuation metrics suggest bonds are expensive, our inflation pressure readings are negative for bonds, our models of investor sentiment are bearish, and the shape of the yield curve has flattened considerably in the U.S. and Canada, all this decreasing the relative appeal of longer term government bonds relative to cash.

Within equities, we view the overall dispersion of opportunities at the regional equity level as remaining low. However, we maintain an overweight in emerging market (EM) equities, albeit downgraded from the previous quarter. EM corporate earnings are still significantly below their long-term trend, as EM economies are still early in their recoveries and are not yet overheating. The gradual rise in commodity prices is also proving to be a tailwind for many emerging economies. Also, several EM currencies appear cheap on a real effective exchange rate basis, which is beneficial for export companies. From a valuation perspective, EM equities continue to trade at a discount relative to developed market stocks. However, the recent increase in global trade risks have warranted a more cautious approach to our EM positioning. At the other end of the regional equity spectrum, we hold a slight underweight position in Japanese equities. As an export-driven equity market, Japan is particularly affected by the current trade war jitters and the slowdown in global trade.

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